The European Central Bank’s chief economist just dropped a loud hint that it could take fresh action to stimulate Europe’s economy.

Falling commodity prices, and signs of economic weakness, mean there is a greater risk that Europe misses its inflation targets, Peter Praet told journalists in Mannheim, Germany. If so, the ECB would act, he insisted.

Here’s Praet’s comments, via Reuters:

“Developments in the world economy and commodity markets have increased the downside risk in achieving the sustainable inflation path towards 2 percent; the risk has increased.

“The governing council will closely monitor all incoming information,” he said. “There should be no ambiguity on the willingness and ability of the governing council to act if needed.”

Which is interesting because the ECB already has a €1 trillion conventional QE programme under way.

So what's next? People's Quantitative Easing? Hard to see what else it could be given that interest rates are already on the floor.

30 Responses

In addition to the directed stimulus effect of PQE, is there a secondary effect resulting from diluting the money created as debt and in so far that there is, on what scale would PQE need to be delivered for this to be significant?

You say that debt can be cancelled on consolidation. As others have already mentioned, if you consolidate between the bank of england and government accounts, you also have to consolidate the cash which also gets cancelled. Which means to work PQE either needs to be printing money or the bank of england balance sheet ends up with a massive hole where it’s assets are supposed to be.

Example

Government 1bn bonds for 1bn cash. Now has assets of 1bn in cash, liabilities of 1bn bonds.

Bank of england buys those bonds using QE. Now has assets of 1bn bonds and liabilities of 1bn cash.

This is where regular QE stops. The action of buying those bonds by the bank of england lowers interest rates.

PQE you say now consolidates the balance sheet of the bank of england with the government. Lets assume you can do this with no legal problems.

You add the assets and liabilities of both sides up. You can’t pick and choose what to consolidate. It has to be everything or nothing – you can’t trick people by only doing one side.

So lets consolidate. Assets now look like +1 cash at government and +1 bonds at bank of england. Liabilties look like -1 cash at bank, -1 bonds at government.

Consolidate and it adds to zero.

So no new money is available for the government to spend.

Unless of course, you are phyiscally printing money outside this process.

Regular QE doesn’t print money in the way you are suggesting. Bonds are purchased by “new” money, but it really just swaps assets and liabilities around. QE works by lowering interest rates.

Regardless, PQE will not be happening in Europe as it is strictly verboten, by law and through treaty. it is silly to suggest that is what they are talking about as it would require treaty change.

I’ve had a look at the government accounts. As other commentators have already noted, the debt purchased through QE moves to the “other financial liabilties” line in the accounts.

So the net liabilities have not changed, and the debt is not cancelled. It’s just called something else.

I gave an example above which you have failed to respond to. Other than stating that there is new cash. My example shows that if you consolidate properly, which is the method you use to “cancel” debt, there is NO new cash.

Unless of course you are simply printing it, or you don’t understand asset+liability accounting.

The legality of PQE is a pretty moot point as well. Apart from the fact that I doubt you have actually tested the law surrounding it or even taken advice from a lawyer regarding it, under EU law the monetary financing of governments is illegal. End of. Which makes it impossible for the UK to do it either. PQE is simply monetary financing and it is very easy to see through the “ruse” you suggest. It would immediately get challenged at EU level.

It is also interesting that you failed to print the whole letter from Darling to King in your other post. it goes on to say:

“The aim of this facility is to improve levels of liquidity in some UK financial markets. I expect the Bank to wind down the fund as normal conditions return. The facility will consequently be withdrawn when it is no longer needed.”

So even when initially set up it was designed to be reversible. Not monetary financing of governments.

I showed using a simple example that consolidation doesn’t cancel debt unless you also cancel the cash which goes along with it. Which invalidates your argument for PQE.

Maybe you can use the same example to show us how it does work, rather than simply stating it does.

Unless you have the power to overturn the Maastricht treaty, PQE is illegal under EU law. Again, it seems like you are simply stating that you have proved it’s legal when in reality it would be years of legal battles and most probably treaty change at EU level for it to happen.

I think the point SPC is making is that in accounting terms there is no difference between what you call substance and form. If you consolidate/cancel/effectively cancel government bonds, shouldn’t the cash also be cancelled or effectively cancelled, as you call it. If not, the accounting falls over.

I’ve also had a look at the BOE and government balance sheets and what SPC says seems to be the case. QE hasn’t changed the sum of government liabilities.

In accounting terms they are not fundamentally different. It’s asset or liability whatever form it takes. You can’t cancel one part of the trade without cancelling the other.

What you seem to be saying is that the BOE could buy government debt ad infinitum, handing cash over to the government in the process which the government then spends. But the debt could simply be immediately cancelled without affecting that cash. So basically a magic money tree.

All you are really suggesting is that the central bank prints money. Why are you bothering to try and clothe your argument in terms of QE?

The ECB appears to have no problem with its Public Sector Purchase Programme (PSPP) buying bonds issued by public entities once they’re held by, presumably, private sector players dealing in the secondary market. As you say, the ECB, or, more accurately, the National Central Banks (NCBs) which comprise the Eurosystem are printing money to buy these securities. They’re able to get around the prohibition on monetary financing by purchasing existing securities. However, I have this feeling the Germans (and possibly some others) would cut up rough if new securities were issued by public entities with the issues underwritten by banks tendering to do the job and the securities sold on immediately to the NCBs.

The Germans have this obsession about achieving a “schwarze Null” (black zero) for the fiscal deficit and are always watching out for attempts by other member-states to avoid the imposition of this Teutonic discipline. If it weren’t so anally retentive and economically damaging this German obsession with the ‘black zero’ would be funny. But there is increasing pressure to separate financing of public invetement from the calculation of the fiscal deficit and to account for it separately. In my view this is a necessary accompaniment to PQE.

It is interesting that 8 member-states are providing their co-funding of investment under this instrument via their National Promotional Banks (NPBs). What I also found interesting is that the UK has committed to co-fund investment under this instrument directly, since, of course, it doesn’t have a NPB.

So they key thing about PQE is that it is used for public investment?
It’s not OMT, and is legal, and indeed is already occurring?
It just happens to be particularly useful at the zero-interest-bound, as it is likely to be a form of fiscal stimulus?

My reading of the tea leaves suggest that the Germans are slowly losing their grip anyway, and that’s not merely a response their behaviour in the Greek debacle.

The EZ’s Macroeconomic Imbalance rules now mean that the Germans can be penalised for excessive trade surpluses (Keynes would be impressed)and some commissioners are looking to enforce it.
Praet’s announcement looks like it may be another example of a growing disregard for the old regime.

It may have been a mistake to locate the ECB in Frankfurt but it definitely wasn’t an accident. The Bundesbank is dominant and they are the control-freaks from hell.
That said, things are changing albeit slowly. Ongoing stagnation takes its toll and it looks like the control-freaks are all out of answers (they’ve lost control).